Resources reporter

BHP Billiton’s productivity agenda has grown profits strongly in the first half of the 2014 financial year, with the miner reporting an underlying result that was 31 per cent better than last year and 12 per cent better than expected.

The $US7.8 billion underlying result was well above analyst expectations, and has allowed BHP to raise interim dividends steadily, but not spectacularly, from US57¢ to US0.59¢.

The significant improvement in profitability was put down to BHP's investment in higher production and improved efficiency at its existing operations, while pulling back spending by 25 per cent.

The company estimated its productivity campaign had achieved cost and volume efficiencies worth $US4.9 billion so far, and promised to continue growing that number in the second half.

As part of that agenda, hundreds of BHP staff lost their jobs and some mines were closed.

The $US7.8 billion underlying profit was a clear improvement on the $US5.68 billion underlying earnings that BHP announced one year ago, and it further builds on expectations that BHP will grow full year profits in fiscal 2014 for the first time since 2011.

A consensus of analysts had expected underlying earnings to be $US6.95 billion, while UBS had predicted $US6.88 billion.

Attributable profit was 81 per cent higher than last year’s half year total at $US8.1 billion.

BHP chief executive Andrew Mackenzie said the company was making good on its promises.

‘‘The commitment we made 18 months ago to deliver more tonnes and more barrels from our existing infrastructure at a lower unit cost is delivering tangible results,’’ he said.

Dividends

The US59¢ dividend was slightly more frugal than the US60¢ that UBS had expected, but was consistent with the US2¢ rises seen in each of the past two sets of February results.

In a reference to BHP's progressive dividend policy, chief executive Andrew Mackenzie said the dividend rise was "in line with our practices''.

Under those practices, BHP is typically more inclined to give a significant boost to dividends at its full year results in August.

Holders of BHP’s Australian shares will be paid the dividend in Australian dollars, meaning that local shareholders will get a much bigger dividend that last year once currency fluctuations are taken into account.

The Australian currency has fallen in value by close to 11 per cent since February 2013, meaning the dividend is close to 9¢ higher than last year in Australian dollar terms.

BHP has subtly hinted that a round of special dividends or share buybacks could be possible within about six months.

BHP has tied such a round of ‘‘capital management’’ to debt milestones, saying previously that it could consider such special returns to shareholders once net debt had reached $US25 billion.

Net debt was standing at $US27.1 billion this morning, but was forecast by BHP to fall to about $US25 billion by the end of the 2014 financial year.

Mr Mackenzie confirmed this morning that such special returns were still possible so long as the debt reduction was achieved.

‘‘It is bringing towards us a discussion of capital management, that of course is a decision that the board have to take, and if we deliver that level of indebtedness towards the end of this financial year I will come back to you at the full year with the authority of our board to talk about future capital management,’’ he said.

In note published shortly after the results were announced, UBS analyst Glyn Lawcock said buybacks were the most likely form of special return.

‘‘We believe capital management would be in the form of an on market share buyback,’’ he said.

When combined with Rio Tinto’s forecasts last week, the 2015 financial year is looming as a potentially strong one for shareholder returns across the major miners.

Rio indicated its improved result had created options for it to consider capital management in February 2015.

Major commodities

The significant jump in profit was achieved despite revenues across the group growing by just $1.9 billion to $US33.94 billion.

Iron ore remains BHP’s most lucrative commodity in terms of both revenue and profit, despite iron ore prices reaching their peak almost three years ago.

Underlying earnings from the division were $US1.7 billion better than the same period in 2013, on the back of a 19 per cent rise in production, better than expected iron ore prices and the declining dollar.

BHP said efforts to remove bottlenecks and other inefficiencies from its iron ore supply chain had boosted earnings by more than $US300 million.

Revenues and underlying earnings were slightly lower in the copper division, despite production of copper rising by six per cent.

The increased mining and refining could not counter a 7 per cent slide in received copper prices.

The petroleum division managed to grow revenues, but was slightly less profitable than the first half of 2013 on the back of close to $US700 million worth of depreciation charges, rig termination charges and other costs related the reduced activity in the shale gas fields of Arkansas and Louisiana.

US gas prices have caused more than $US3 billion worth of impairments at BHP over recent years, which would have made the 13 per cent rise in received gas prices all the more welcome.

A recent cold snap has sent US gas prices to their highest levels in four years, and BHP said strong demand was likely to persist for some time.

"With storage rates now below the historical, seasonally adjusted five year minimum inventory level, short term prices should be supported as gas will need to be reinjected into storage capacity when demand comes off its seasonal peak,'' the company said.

Minnows

One notable change over the past year has been the performance in BHP’s non-core commodities; Nickel, Aluminium and Manganese.

Those three collectively made a $US108 million underlying loss in the first half of fiscal 2013, which became a $US3.5 billion loss once impairments were included.

The divisions have sprung back into profitability this year, collectively reporting an underlying and final profit of $US148 million.

The improvement was achieved despite sliding prices for all three commodities, and based on efficiency gains and good fortune in the form of a stronger US dollar.

Despite a recent rise in Nickel prices on the back of a material export ban in Indonesia, BHP said high inventory levels would prevent a major rise in the price.

Economy

BHP was upbeat about the direction of the global economy, saying ‘‘the balance of risk to global growth was skewed to the upside’’.

The miner noted stability in Europe and improvements in the US, but said volatility was likely to be seen in China as the government gradually introduced tighter monetary environments.

China buys most of Australia’s iron ore, and Mr Mackenzie said while demand should continue to be strong in the near term, the long anticipated wave of supply was starting to hit the market and would have an impact on iron ore prices within a year.

"Our conclusion is that there is more supply coming into the iron ore market than there is demand growth," he said.